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Friday, February 24, 2012

The Gold Bugs: The Psychology of Gold*

"Nonsense! no!--the bug. It is of a brilliant gold color--about the size of a large hickory nut--with two jet black spots near one extremity of the back, and another, somewhat longer, at the other. The antennae are-- Edgar Allan Poe The Gold Bug

The pending economic crisis that now faces America is painfully obvious. If even a fraction of potential foreign claims against our gold supply were presented to the Treasury, we would have to renege on our promise. We would be forced to repudiate our own currency on the world market. Foreign investors, who would be left holding the bag with American dollars, would dump them at tremendous discounts in return for more stable currencies, or for gold itself--Erza Taft Benson 1967 (who was the US Secretary of Agriculture under Eisenhower)

Gold (XAU - ISO 4217) is at an all time high on the market. Everyone (from Glenn Beck to Frank Stansberry who owns "endofamerica4.com" which gives a lengthy spiel1 on the coming collapse of the American dollar) thinks you should be buying it. What's going on with this!?

First and Foremost: They Want Your Money
The first thing behind the pushing of the Gold Bug psychology is that the companies behind it have a lot of money and, well, want yours. Gold is driven somewhat by supply, demand, and speculation. As most gold ever mined is still accessible (and would, if put together, make a cube 20.2 meters on a side) the major price determination is the change in demand. In other words, the more gold you buy, the more everyone else's gold is worth. This creates a natural pyramid scheme where everyone who buys in wants everyone else to buy in too.

When that's not enough, there's fraud: This info-graphic shows how Glenn Beck's backer, Goldine, uses bald-faced fear tactics (the 1933 FDR prohibition on owning large quantities of gold) to entice customers to buy collectible coins which make Goldline a lot more money and have the customer lose theirs.

So any time anyone is telling you to buy gold? If they're taking their own advice? They have a, uh, conflict of interest.

Secondly: -The Economic Factor- The Gold Hedge
If Gold wasn't at an all time high right now, however, it might well be a good buy. The people who stocked up in 1999 are certainly happy if they held on to it (and they ought to start considering selling soon, I'd think). The reason for buying gold, traditionally (and other precious metals to a degree) is as a hedge or insurance against either inflation or currency devaluation.

While we might in the future see these due to Quantitative Easing (the Federal Reserve is putting more money into the monetary supply) we do not see these yet. Also, in the housing market crash billions of dollars of value were actually destroyed so the creation of new money might not quite be the inflationary driver you'd think.

On the other hand, some people think inflation "has already happened" and the reason the stock market is so high is because of the huge creation of dollars held by banks.
This graph from Zero Hedge (the Economic Apocalypse Channel!) says this:

Wondering why the DJIA just passed 13K again? Wonder no more: as the chart below shows it is entirely due to the nearly $7 trillion pumped by global central banks into the world stock markets just in the past 4 years. As Sean Corrigan from Diapason notes, the aggregate global central bank balance sheet has doubled in four years, after doubling in the 5 years before that. We would add that with the entire centrally planned ponzi scheme hell bent on preserving the illusion of nominal gains, global liquidity is now fungibly sloshing from one market to another with absolutely zero resistance whatsoever.

Did you follow all that? No. Me either. But from what I did follow the idea that we're seeing inflation and therefore should be sheltering with gold isn't insane--it's just that the all-economic-collapse-all-the-time Zero Hedge guys lack a certain shall we say credibility.

Additionally, even if they were correct, the time to get in probably isn't now. If the global economy collapses gold prices will almost certainly drop too as people start using it to, you know, buy things. Also note: depending on how you were to buy gold it might not help. As USA Today notes:

If the global economic system collapses, just owning a gold ETF probably isn't going to cut it. You can't use your shares of SPDR Gold Trust at the grocery store to buy beef jerky.

Thirdly: -The Psychological Factor- Apocalypse Chic
The real reason, though, that I think American Gold buying is soaring is because of Apocalypse Thinking. The idea is this: believing an apocalypse is coming is pleasant if you believe you are one of the few prepared for it. Believing that you are going to be one of the few saved--or one of the few prepared--when the end-times come is a powerful psychological force. With Fox news guys like Glenn Beck and, uh, the real world, pumping out uncertainty and bad news on a daily basis buying gold is marketed as the panacea for the "coming economic firestorm."

This plays to all our worst instincts in a powerful fashion--remember that one of the joys of heaven was allegedly "beholding the vengeance of god" and "beholding the smoke of the torment of the wicked as a passing delectation."

The Benson quote at the start of the blog is, if you google it, repeated often on gold-scare websites without noting that it was said in 1967 before the end of the Gold Standard (today countries "requesting their gold" would be given their gold--it would not impact our currency). Whether he was ever right or not, it isn't relevant now.

Fourthly: -The Biblical Factor- Honest Currency
Underlying some of the Gold-Bug sentiment is a belief that the bible mandates the use of "honest currency" which, in the common formulation, would be gold and silver. The actual verses cited have to do with not using tricked scales in market transactions--but these get extended to using 'imaginary' money. Google Honest Money if you have further questions but understand this: some people have a deep aversion to our current dollars and see gold and gold-advocacy as a way to return us to biblical purity (this is more an argument against the modern banking system than gold investment but the two can often go together).

Let's Look: Today's Article
I want to end with this article: it's a Forbes opinion piece that says "Gasoline Prices are Not Rising--The Dollar is Falling." It links this to the price of gold! Here is the chain of logic:

Gas trades at 105 USD for a barrel of Texas Crude. In other currencies ... it's the same price.

But how you know if this is "high" or "low" is to compare it to the price of gold. A barrel is .0602 oz of gold!

Since 1971 a barrel has averaged .0732 oz-per-barrel. In other words, it takes less gold today to buy a barrel of crude than it did in 1971. Gold, of course, is at an all-time-high today.

He makes an argument that the price of gas is similar to the price of gold ... THEREFORE ...

The price of gas must go up to match the price of gold--about 75 cents per gallon!

Then we see this:

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices.

This is quite a leap of logic: because the dollar is undefined the price of gold can go anywhere and there's no limit. Call me crazy, but I think Mad Max would pay whatever it costs for a gallon of gasoline regardless of the currency or lack thereof. The author then launches into an indictment of government--which, I suspect was the real point all along. I don't have his 30-year data but the Internet will provide me with 5 year graphs of gold and oil. If he's right, the chart should look the same as oil prices seek gold prices. Let's look:

Five Year Gas PricesAnd The Sure-To-Be-Identical Gold Prices

Not all that similar. In fact, one might think they're not all that well correlated at all.

One can note that commodities do, in fact tend to work inversely to the strength of the dollar. As gold and fuel are commodities it is true that as the dollar gets weaker oil and gas will go up. However the idea that he's positing--with no proof whatsoever other than his take on chosen numbers--is that gold is somehow the "real price" of gas (and everything else). This is one of the almost-religious aspects of the Gold Bug movement and one of the least explicable.

What Do I Think?
I think that Gold Bugs imbue gold with a significance that is basically superstitious in nature and then fit the economic evidence into that framework. This combines with a strong contrarian streak and the apocalypse/religious thinking that we human beings are prone to (I do not know of major religious leaders who decry the Federal Reserve or fiat money--making me think that this interpretation of the bible is fairly weak). Gold does have special significance to us. It always has--but that is not a reason to start investing when it's at an all time high--or any other time. Invest in gold when your financial adviser tells you to.

* This being a family friendly blog I could not use my preferred title: Gold Buggery. You're welcome.

1I am pretty sure the piece ends with "buy gold" once you pay for his private news letter. I could not make it all the way through and there is no way to fast forward. Note that the guy pitching it has had fraud troubles with the SEC, is basing a lot of his theory on a secret meeting Robert Fisk thinks took place (I suspect Robert Fisk thinks secret meetings are constantly conspiring against him), and he uses the Holocaust as an It-can't-happen-here piece of psychological leverage which is, really, pretty manipulative (not to mention lousy history: the Jews facing the holocaust may not have imagined how bad it would get--but they all knew their history and knew that states had turned on them many times before).2If you type "Cash for gold scams" (or Fraud) into Google all the top hits are people trying to give you cash for gold and pretending to tell you how to avoid being scammed (use us! We're great!). This, alone, should tell you something about the economic ecosystem at work here.